Yeah, and the dog ate my homework.
There’s no denying that the nearly completed earnings season has been a disappointment for many companies. But, as far as I can tell, the dollar’s primary role in that disappointment has been to be a convenient whipping boy for CEOs desperate to blame anything other than themselves.
I concede that there is some superficial legitimacy to blaming the strong dollar: A huge chunk of U.S. corporate revenue comes from foreign sales — nearly half of all sales, according to S&P Indices’s Howard Silverblatt. And the dollar-denominated value of those sales declines as the greenback appreciates.
But what about the other half of corporate balance sheets — their expenses? A similarly big percentage of those expenses come from overseas too — from raw- to finished materials as well as labor costs. And a strong dollar means that those costs of doing business will go down.
I was unable to determine the percentage of S&P 500 company expenses that are non-dollar-denominated, and therefore whether those expenses exceed foreign sales. Silverblatt told me that the relevant reporting is “poor.”
But we do know that, in the aggregate, a stronger dollar should be more of a net positive for the U.S. economy than a net negative. That’s because the U.S. runs a sizeable trade deficit with the rest of the world — more than a half a trillion dollars per year, in fact.
To be sure, the U.S. trade deficit is relatively small as a percentage of GDP — less than 5%. So we’d be going too far to argue that a strong dollar will provide a big economic boost. But the mere existence of a trade deficit should put the burden of proof on those who argue that a strong dollar is bad for the stock market.
I’m not holding my breath. Upon subjecting the historical data to statistical scrutiny, I was unable to find any significant correlation between the dollar’s foreign-exchange value and the U.S. stock market.
The accompanying chart plots the S&P 500’s change over the trailing 12 months against changes in the U.S. dollar index . That index is a composite of the U.S. dollar’s value against a basket of foreign currencies, with each of those foreign currency’s weights in the index a function of its share of U.S. foreign trade. So this index should be a sensitive barometer of both the costs and benefits of the dollar’s fluctuations.
Notice the absence of any obvious relationship between the two. Nor do your eyes deceive you: My PC’s statistical software was unable to detect any statistically significant correlation.
To double-check this finding, I next searched for any correlation between S&P 500 earnings per share and the U.S. dollar index. I looked both for contemporaneous relationships as well as for the possibility that a change in the dollar’s value has a delayed impact on corporate earnings. Once again I came up empty.
I don’t doubt that some will be able to slice and dice the data in a way that makes it appear as though there is some significant relationship between the dollar’s value and the stock market’s level. But the investment value of such a relationship is questionable if you have to torture the data that much in order for it to be revealed.
I should also stress that just because a stronger dollar isn’t a big source of concern for stock prices, you shouldn’t therefore conclude that the bull market is alive and well. There are plenty of other things to worry about, some of which I have enumerated in recent columns.
But if you have been bearish primarily because of concern about a stronger U.S. dollar, you may be worrying for nothing.